STERLING BANK OF ASIA INC. (A Savings Bank) Financial Statements December 31, 2015 and 2014 REYES TACANDONG & CO. FIRM PRINCIPLES. WISE SOLUTIONS.

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1 STERLING BANK OF ASIA INC. (A Savings Bank) Financial Statements December 31, 2015 and 2014 With independent auditor s report provided by REYES TACANDONG & CO. FIRM PRINCIPLES. WISE SOLUTIONS.

2 C O V E R S H E E T for AUDITED FINANCIAL STATEMENTS SEC Registration Number A C O M P A N Y N A M E S t e r l i n g B a n k o f A s i a I n c. ( A S a v i n g s B a n k ) PRINCIPAL OFFICE (No./Street/Barangay/City/Town) Province) S t e r l i n g B a n k C o r p o r a t e C e n t e r, G r e e n h i l l s, S a n J u a n, M e t r o M a n i l a l Form Type Department requiring the report Secondary License Type, If Applicable A A F S C R M D N / A C O M P A N Y I N F O R M A T I O N Company s Address Company s Telephone Number/s Mobile Number (02) No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day) 18 3rd Monday of April December 31 CONTACT PERSON INFORMATION The designated contact person MUST be an Officer of the Corporation Name of Contact Person Address Telephone Number/s Mobile Number Ms. Dalisay N. Rubio dnrubio@sterlingbankasia.com (02) CONTACT PERSON S ADDRESS Sterling Bank Corporate Center, Greenhills, San Juan, Metro Manila NOTE 1: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated. NOTE 2: All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt shall not excuse the corporation from liability for its deficiencies.

3 STERLING BANK OF ASIA INC. (A Savings Bank) STATEMENTS OF FINANCIAL POSITION ASSETS December 31 Note Cash and Other Cash Items P=688,754,312 P=903,508,869 Due from Bangko Sentral ng Pilipinas 3,107,652,243 3,964,969,282 Due from Other Banks 1,441,016,646 2,317,217,108 Interbank Loans Receivable 8 1,148,219, ,686,821 Financial Assets at Fair Value through Profit or Loss 9 2,130,532,834 4,169,762,311 Available-for-Sale Financial Assets 10 2,436,144,847 4,055,409,510 Held-to-Maturity Investments ,029, ,794,376 Loans and Receivables 12 18,635,289,930 16,852,583,926 Property and Equipment ,757, ,274,829 Assets Held for Sale ,201, ,274,908 Branch Licenses ,390, ,390,000 Net Deferred Tax Assets 26 44,207,985 17,479,611 Other Assets 16 91,703, ,002,176 TOTAL ASSETS P=30,900,899,549 P=34,222,353,727 LIABILITIES AND EQUITY Liabilities Deposit Liabilities 17 P=26,888,986,133 P=29,364,871,176 Manager s Checks 136,967, ,068,397 Bills Payable 18 36,781, ,183,853 Accrued Interest, Taxes and Other Expenses ,585, ,840,942 Unsecured Subordinated Debt ,000, ,000,000 Net Retirement Liability 24 62,594,572 64,691,511 Income Tax Payable 2,900,143 Other Liabilities ,243,527 1,107,019,992 Total Liabilities 28,392,059,633 31,721,675,871 Equity Common Stock 27 2,070,000,000 1,895,000,000 Perpetual Preferred Stock ,000, ,000,000 Other Equity Reserves (197,152,456) 813,067 Retained Earnings 335,992, ,864,789 Total Equity 2,508,839,916 2,500,677,856 TOTAL LIABILITIES AND EQUITY P=30,900,899,549 P=34,222,353,727 See accompanying Notes to Financial Statements.

4 STERLING BANK OF ASIA INC. (A Savings Bank) STATEMENTS OF INCOME Years Ended December 31 Note INTEREST INCOME ON: Loans and receivables 12 P=1,395,910,412 P=1,289,272,433 Investment securities 9 305,835, ,554,447 Due from Bangko Sentral ng Pilipinas and other banks 44,186,356 33,820,046 Interbank loans receivable 8 5,420,113 2,914,284 1,751,352,514 1,687,561,210 INTEREST EXPENSE ON DEPOSIT LIABILITIES, BILLS PAYABLE AND OTHERS ,683, ,466,925 NET INTEREST INCOME 1,193,668,776 1,064,094,285 OTHER INCOME (CHARGES) Service charges, fees and commissions 172,615, ,037,491 Net trading and securities gains (losses) 9 (119,855,061) 326,869,278 Net foreign exchange gains 70,932,973 34,918,407 Net gain (loss) from assets sold or acquired 14 (14,036,406) 14,391,449 Others - net 21,242,789 12,783, ,899, ,999,916 OPERATING EXPENSES Compensation and fringe benefits 434,148, ,461,973 Taxes and licenses 183,421, ,666,228 Occupancy 108,399, ,703,381 Depreciation and amortization 13 84,162,180 78,674,048 Representation and entertainment 61,759,296 66,359,809 Insurance 59,281,918 57,809,384 Security, messengerial and janitorial 52,301,654 49,093,926 Others ,440, ,679,657 1,162,914,685 1,234,448,406 PROVISION FOR CREDIT AND IMPAIRMENT LOSSES 12 81,583, ,599,245 INCOME BEFORE INCOME TAX 80,070, ,046,550 INCOME TAX EXPENSE 26 Current 76,397,997 81,064,951 Deferred (27,455,127) (25,431,222) 48,942,870 55,633,729 NET INCOME P=31,127,583 P=110,412,821 See accompanying Notes to Financial Statements.

5 STERLING BANK OF ASIA INC. (A Savings Bank) STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 Note NET INCOME P=31,127,583 P=110,412,821 OTHER COMPREHENSIVE INCOME (LOSS) Items to be reclassified to profit or loss Net unrealized gains (losses) on available-for-sale financial assets 10 (212,672,127) 159,050,930 Translation adjustment 13,010,846 (9,189,332) Item not to be reclassified to profit or loss Remeasurement gains on retirement liability, net of deferred tax 24 1,695,758 (197,965,523) 149,861,598 TOTAL COMPREHENSIVE INCOME (LOSS) (P=166,837,940) P=260,274,419 See accompanying Notes to Financial Statements.

6 STERLING BANK OF ASIA INC. (A Savings Bank) STATEMENTS OF CHANGES IN EQUITY Years Ended December 31 Note COMMON STOCK 27 Balance at beginning of year P=1,895,000,000 P=1,625,000,000 Issuance of shares 175,000, ,000,000 Balance at end of year 2,070,000,000 1,895,000,000 PERPETUAL PREFERRED STOCK 27 Balance at beginning of year 300,000,000 62,500,000 Issuance of shares 237,500,000 Balance at end of year 300,000, ,000,000 OTHER EQUITY RESERVES Cumulative Unrealized Gains (Losses) on Available-for-Sale Financial Assets 10 Balance at beginning of year 24,605,598 (134,445,332) Net unrealized gains (losses) (212,672,127) 159,050,930 Balance at end of year (188,066,529) 24,605,598 Cumulative Translation Adjustment Balance at beginning of year (23,293,379) (14,104,047) Translation adjustment 13,010,846 (9,189,332) Balance at end of year (10,282,533) (23,293,379) Cumulative Remeasurement Gains (Losses) on Retirement Liability Balance at beginning of year (499,152) (499,152) Remeasurement gain, net of deferred tax 24 1,695,758 Balance at end of year 1,196,606 (499,152) (197,152,456) 813,067 RETAINED EARNINGS Balance at beginning of year 304,864, ,451,968 Net income 31,127, ,412,821 Balance at end of year 335,992, ,864,789 P=2,508,839,916 P=2,500,677,856 See accompanying Notes to Financial Statements.

7 STERLING BANK OF ASIA INC. (A Savings Bank) STATEMENTS OF CASH FLOWS Years Ended December 31 Note CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=80,070,453 P=166,046,550 Adjustments for: Unrealized trading losses (gains) on financial assets at fair value through profit or loss 9 180,862,254 (56,799,583) Depreciation and amortization 13 84,162,180 78,674,048 Provision for credit and impairment losses 12 81,583, ,599,245 Gain on sale of available-for-sale financial assets 10 (18,435,318) (45,677,438) Retirement benefits 24 16,221,739 16,477,610 Net loss (gain) from assets sold or acquired 14 14,036,406 (14,391,449) Amortization of premium on held to maturity investments 11 7,021,777 3,290,542 Provision for impairment losses on assets held for sale 25 5,464,517 Operating income before working capital changes 445,523, ,684,042 Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Financial assets at fair value through profit or loss 1,858,367,223 (2,519,236,732) Loans and receivables (1,946,008,627) (869,392,686) Other assets 15,299,080 (9,061,204) Increase (decrease) in the amounts of: Deposit liabilities (2,475,885,043) 6,586,486,033 Manager s checks (14,100,588) 33,687,460 Accrued interest, taxes and other expenses (47,255,077) 3,595,736 Other liabilities (463,776,465) 317,221,578 Net cash generated from (used for) operations (2,627,836,466) 3,914,984,227 Income tax paid (73,497,854) (80,054,197) Retirements benefits paid 24 (15,896,167) Net cash flows provided by (used in) operating activities (2,717,230,487) 3,834,930,030 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Available-for-sale financial assets (1,000,330,954) (3,100,847,163) Property and equipment 13 (59,704,614) (56,574,621) Held-to-maturity investments (211,881,800) Proceeds from sale of: Available-for-sale financial assets 2,329,592,547 2,691,910,383 Assets held for sale 78,976,074 77,042,823 Property and equipment 5,839,971 3,494,463 Net cash flows provided by (used in) investing activities 1,354,373,024 (596,855,915) (Forward)

8 - 2 - Years Ended December 31 Note CASH FLOWS FROM FINANCING ACTIVITIES Payments of bills payable (P=615,670,091) (P=1,001,731,637) Proceeds from: Availments of bills payable 364,777,400 1,063,537,712 Issuance of capital stock ,000, ,500,000 Net cash flows provided by (used in) financing activities (75,892,691) 569,306,075 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 13,010,846 (9,189,332) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,425,739,308) 3,798,190,858 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 903,508, ,079,022 Due from Bangko Sentral ng Pilipinas 3,964,969,282 2,737,379,105 Due from other banks 2,317,217, ,268,106 Interbank loans receivable 8 625,686,821 11,464,989 7,811,382,080 4,013,191,222 CASH AND CASH EQUIVALENTS AT END OF THE YEAR Cash and other cash items 688,754, ,508,869 Due from Bangko Sentral ng Pilipinas 3,107,652,243 3,964,969,282 Due from other banks 1,441,016,646 2,317,217,108 Interbank loans receivable 8 1,148,219, ,686,821 P=6,385,642,772 P=7,811,382,080 OPERATING CASH FLOWS FROM INTEREST Interest received P=1,435,555,243 P=1,385,841,653 Interest paid 569,918, ,331,063 NONCASH OPERATING INFORMATION Reclassification of loans and receivables to assets held for sale 14 P=81,719,083 P=70,145,367 See accompanying Notes to Financial Statements.

9 STERLING BANK OF ASIA INC. (A Savings Bank) NOTES TO FINANCIAL STATEMENTS 1. Corporate Information Sterling Bank of Asia Inc. (A Savings Bank) was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) and Bangko Sentral ng Pilipinas (BSP) to engage primarily in the general business of savings and mortgage banking. The Bank offers a wide range of products and services such as deposit products, loans, treasury and trust functions. The Bank was granted authority to engage in trust operations in 2008 and to issue foreign letters of credit in As at December 31, 2015 and 2014, the Bank operates a total of 42 and 41 branches, respectively. The Bank was formerly known as Far East Savings Bank (FESB) and originally issued with Certificate of Incorporation by the SEC on January 20, In 2006, JTKC Equities, Inc. (JEI), Surewell Equities, Inc. (SEI) and Star Equities, Inc. acquired all the outstanding shares of stock of FESB from the Bank of the Philippine Islands. In 2007, the change in corporate name of FESB to Sterling Bank of Asia Inc. (A Savings Bank) was approved by the BSP and the SEC. In 2009, the BSP approved the Bank s application to acquire 100% of the shares of stock of Centennial Savings Bank (CSB). In 2010, as approved by the BSP and the SEC, the Bank, as the surviving entity, merged with CSB. As at December 31, 2015 and 2014, the ultimate parent of the Bank is JEI, through a direct interest of 40% and 44%, respectively, and indirect interest of 30% and 26%, respectively, through Star Equities, Inc., a wholly owned subsidiary of JEI. The registered office address of the Bank is at Sterling Bank Corporate Center, Greenhills, San Juan, Metro Manila. The financial statements of the Bank as at and for the years ended December 31, 2015 and 2014 have been approved and authorized for issue by the Bank s Board of Directors (BOD) on March 22, Basis of Preparation and Statement of Compliance The financial statements have been prepared under the historical cost basis, except for: financial assets at fair value through profit or loss (FVPL) and available-for-sale (AFS) financial assets, which are carried at fair value, assets held for sale, which are measured at the lower of cost and fair value less cost-to-sell, and net retirement liability, which is carried at the present value of defined benefit obligation less the fair value of plan assets. The financial statements are presented in Philippine Peso, which is the functional and presentation currency of the Bank. All amounts are in absolute values, unless otherwise indicated.

10 The financial statements have been prepared in compliance with the Philippine Financial Reporting Standards (PFRS) issued by the Financial Reporting Standards Council and adopted by the SEC. This financial reporting framework includes PFRS, Philippine Accounting Standards (PAS), and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC). The financial statements of the Bank include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of the RBU and FCDU is the Philippine Peso and United States Dollar (USD), respectively. For financial reporting purposes, the FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalent amounts in Philippine Peso, which is the functional and presentation currency of the Bank. The financial statements of RBU and FCDU are combined after eliminating inter-unit accounts. 3. Summary of Changes in Accounting Standards Adoption of New and Revised PFRS The Bank adopted the following new and revised PFRS effective January 1, 2015 as summarized below. Amendment to PAS 16, Property, Plant and Equipment - Revaluation Method - Proportionate Restatement of Accumulated Depreciation, and PAS 38, Intangible Assets - Revaluation Method - Proportionate Restatement of Accumulated Amortization - The amendment clarifies how the gross carrying amount and the accumulated depreciation / amortization are treated when an entity uses the revaluation model. Amendment to PAS 19, Employee Benefits - Defined Benefit Plans: Employee Contributions - The amendments clarify the requirements on how contributions from employees or third parties that are linked to service should be attributed to periods of service. In particular, contributions that are independent of the number of years of service can be recognized as a reduction in the service cost in the period in which the related service is rendered (instead of attributing them to the periods of service). Amendment to PAS 24, Related Party Disclosures - Key Management Personnel - The amendment clarifies how payments to entities providing key management personnel services are to be disclosed. Amendment to PFRS 13, Fair Value Measurement - Short-term Receivables and Payables and Portfolio Exception - The amendment clarifies that short-term receivables and payables with no stated interest rates can be held at invoice amounts when the effect of the discounting is immaterial, and that the portfolio exception in PFRS 13 - allowing an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis - applies to all contracts (including non-financial) within the scope of PAS 39, Financial Instruments: Recognition and Measurement or PFRS 9, Financial Instruments. The adoption of the foregoing new and revised PFRS did not have any material effect on the financial statements of the Bank. Additional disclosures have been included in the notes to financial statements, as applicable.

11 New and Revised PFRS Not Yet Adopted Relevant new and revised PFRS, which are not yet effective for the year ended December 31, 2015 and have not been applied in preparing the financial statements, are summarized below. Effective for annual periods beginning on or after January 1, 2016: Amendments to PAS 1, Presentation of Financial Statements - The amendments clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. Amendments to PAS 16, Property, Plant and Equipment - Clarification of Acceptable Methods of Depreciation, and PAS 38, Intangible Assets - Clarification of Acceptable Methods of Amortization - The amendments add guidance and clarify that (i) the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset, and (ii) revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset; however, this presumption can be rebutted in certain limited circumstances. Amendment to PAS 19, Employee Benefits - The amendment clarifies that the high quality corporate bonds used in estimating the discount rate for post-employment benefits should be denominated in the same currency as the benefits to be paid. Amendment to PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - The amendment adds specific guidance when an entity reclassifies an asset (or a disposal group) from held for sale to held for distribution to owners, or vice versa, and for cases where heldfor-distribution accounting is discontinued. Effective for annual periods beginning on or after January 1, PFRS 9, Financial Instruments - This standard will replace PAS 39 (and all the previous versions of PFRS 9). It provides requirements for the classification and measurement of financial assets and financial liabilities, impairment, hedge accounting and derecognition. PFRS 9 requires all recognized financial assets to be subsequently measured at amortized cost or fair value (through profit or loss or through other comprehensive income), depending on their classification by reference to the business model within which they are held and their contractual cash flow characteristics. For financial liabilities, the most significant effect of PFRS 9 relates to cases where the fair value option is taken: the amount of change in fair value of a financial liability designated as at fair value through profit or loss that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (rather than in profit or loss), unless this creates an accounting mismatch. For the impairment of financial assets, PFRS 9 introduces an expected credit loss model based on the concept of providing for expected losses at inception of a contract; it will be no longer necessary for objective evidence of impairment before a credit loss is recognized.

12 For hedge accounting, PFRS 9 introduces a substantial overhaul allowing financial statements to better reflect how risk management activities are undertaken when hedging financial and non-financial risk exposures. The derecognition provisions are carried over almost unchanged from PAS 39. Under prevailing circumstances, the adoption of the foregoing new and revised PFRS, except for PFRS 9, is not expected to have any material effect on the financial statements of the Bank. Additional disclosures will be included in the financial statements, as applicable. The Bank anticipates that the application of PFRS 9 might have a significant effect on the amounts reported with respect to the financial assets and liabilities of the Bank. However, no reasonable estimate of the effect will be available until a detailed review has been completed. 4. Summary of Significant Accounting Policies The significant accounting and reporting policies that have been used in the preparation of the financial statements of the Bank are summarized below. These policies have been consistently applied to all the years presented, unless otherwise stated. Financial Instruments Date of Recognition. Financial instruments are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. In the case of regular way purchases or sales of financial assets, recognition and derecognition, as applicable is done using settlement date accounting. Initial Recognition. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in the case of an asset) or received (in the case of a liability). The initial measurement of financial instruments, except for those designated at FVPL, includes transaction cost. Day 1 Difference. Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data observable from the market, the Bank recognizes the difference between the transaction price and fair value (a Day 1 difference) in profit or loss unless it qualifies for recognition as some other type of asset. For each transaction, the Bank determines the appropriate method of recognizing the Day 1 difference. Classification. The Bank classifies its financial assets at initial recognition under the following categories: (a) financial assets at FVPL, (b) held-to-maturity (HTM) investments, (c) loans and receivables and (d) AFS financial assets. Financial liabilities, on the other hand, are classified as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the financial instruments are acquired or incurred and whether they are quoted in an active market. Financial Assets and Liabilities at FVPL. Financial assets and liabilities at FVPL include financial assets and liabilities held for trading purposes and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if these are acquired for purposes of selling and repurchasing in the near term. Derivatives, including any separated embedded

13 derivatives, are also classified as financial assets or financial liabilities at FVPL, unless these are designated as hedging instruments in an effective hedge. Financial assets or liabilities may be designated by the Bank upon initial recognition as at FVPL when any of the following criteria are met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing related gains or losses on a different basis; the assets and liabilities are part of a group of financial assets, liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instruments contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Financial assets and liabilities at FVPL are recorded in the statements of financial position at fair value. Subsequent changes in fair value are recognized as Net trading and securities gains in profit or loss. Interest earned or incurred is recognized as interest income or expense, respectively, while dividend income is recognized as other income when the right to receive payment has been established. As at December 31, 2015 and 2014, investments in government securities and private bonds are included in this category (see Note 9). AFS Financial Assets. AFS financial assets are nonderivative financial assets that are either designated in this category or not classified in any of the other categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS financial assets are subsequently measured at fair value or at cost less impairment in the case of unquoted securities. The effective yield component of AFS debt securities, as well as the impact of restatement of any foreign currency-denominated AFS debt securities, is recognized in profit or loss. The unrealized gains and losses arising from the fair valuation of AFS financial assets are recognized as Net unrealized gains (losses) on AFS financial assets in other comprehensive income. When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized as Net trading and securities gains in profit or loss. Where the Bank holds more than one investment in the same security, these are deemed to be disposed of on a first-in, first-out basis. Interest earned or paid on the investments are recognized as Interest income in profit or loss using the effective interest method. Dividends earned on investments are recognized in profit or loss when the right of the payment has been established. These financial assets are classified as noncurrent assets unless the intention is to dispose such assets within the 12 months from the end of reporting year. As at December 31, 2015 and 2014, investments in government securities, private bonds and unquoted equity security are included in this category (see Note 10). HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Bank has the positive intention and

14 ability to hold to maturity. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest method, less any impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is recognized in Interest income in profit or loss. Gains and losses are recognized in profit or loss when the HTM investments are derecognized or impaired, as well as through amortization process. The losses arising from impairment of such investments are recognized as Provision for credit and impairment losses in profit or loss. The effect of the restatement of the foreign currency- denominated HTM investments are recognized in profit or loss. When the Bank sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS financial asset. Subsequently, the Bank would be prohibited to classify any financial assets as HTM investments for the following two years. The Bank cannot classify financial assets as HTM if the Bank, during the current financial year or during the two preceding years, sold or reclassified more than an insignificant amount of HTM investments before maturity (in relation to the total amount of HTM investments) other than sales or reclassifications that: are so close to maturity or the financial asset s call date (for example, less than three months before maturity) that changes in the market rate of interest would not have a significant effect on the financial asset s fair value; occur after the Bank has collected substantially all of the financial asset s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the Bank s control, is non-recurring and could not have been reasonably anticipated by the Bank. As at December 31, 2015 and 2014, investments in government debt securities are included in this category (see Note 11). Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest method, less allowance for impairment in value. Any interest earned on loans and receivables is recognized as part of Interest income recognized in profit or loss on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. The periodic amortization is also included as part of Interest income recognized in profit or loss. Gains or losses are recognized in profit or loss when loans and receivables are derecognized, as well as through the amortization process. As at December 31, 2015 and 2014, cash and other cash items (COCI), due from BSP and other banks, interbank loans receivable, loans and receivables, refundable deposits and returned checks and other cash items (RCOCI) are included under this category (see Notes 8, 12 and 16). For purposes of the statement of cash flows, cash and cash equivalents consist of COCI, due from BSP and other banks, and interbank loans receivable, with original maturities of three months or less from the date of acquisition and subject to insignificant risk in fluctuations in value.

15 Other Financial Liabilities. Other financial liabilities pertain to financial liabilities that are not held for trading and are not designated at FVPL at the inception of the liability. Other financial liabilities are recognized initially at fair value less any direct transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium. Gains and losses are recognized in profit or loss when the liabilities are derecognized or through the amortization process. As at December 31, 2015 and 2014, deposit liabilities, manager s checks, bills payable, accrued interest and other expenses, unsecured subordinated debt and other liabilities (excluding statutory obligations and taxes payable) are included under this category. Derecognition of Financial Assets and Liabilities. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Bank retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to pay. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in profit or loss.

16 Financial Guarantees. In the ordinary course of business, the Bank provides financial guarantees. Financial guarantees are initially recognized in the statements of financial position at fair value. Subsequently, the initial fair value is amortized over the term of the financial guarantee. The guarantee liability is subsequently carried at the higher of the amortized amount and the present value of any expected payment (when a payment under the guarantee has become probable). Reclassification of Financial Assets. A financial asset is reclassified out of the FVPL category when the following conditions are met: the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and there is a rare circumstance. Any gain or loss already recognized in profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes the new amortized cost, as applicable. A financial asset reclassified out of the AFS financial assets category is at its fair value on the date of reclassification. Any previous gain or loss that has been recognized in other comprehensive income is amortized to profit or loss over the remaining term of the investment using the effective interest method. If the asset is subsequently determined to be impaired, then the amount recognized in other comprehensive income is reclassified from equity to profit or loss. Reclassification is at the election of management and is determined on an instrument-by-instrument basis. In 2008, the Bank reclassified USD-denominated investment securities from AFS financial assets to HTM investments (see Note 10). Impairment of Financial Assets. The Bank assesses at the end of each reporting year whether there is objective evidence that a financial asset or group of financial assets may be impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that borrower or a group of borrowers will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial Assets Carried at Amortized Cost. For financial assets carried at amortized cost, the Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the excess of financial asset s carrying amount over its net realizable value, normally based on the present value of the estimated future cash flows from the financial asset. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. Time value is generally not considered when the effect of discounting is not material.

17 If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Any impairment loss is recognized in profit or loss. The carrying amount of an impaired financial asset is reduced to its net realizable value through the use of an allowance account. For an impaired financial asset, interest income continues to be recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the industry of the borrower. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for the assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Restructured Loans. Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered as past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The restructured loan continues to be subject to an individual (calculated using the loan s original effective interest rate) or collective impairment. The difference between the recorded value of the original loan and present value of the restructured cash flows, discounted at the original effective interest rate is recognized as Provision for credit and impairment losses in profit or loss. AFS Financial Assets. The Bank assesses at each reporting date whether there is objective evidence that an investment is impaired. In the case of AFS debt investments, the Bank assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amount recognized for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recognized as part of Interest income in profit or loss. If, in the subsequent year, the fair value of a debt investment increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss. In the case of AFS equity investments, evidence of impairment would include a significant or prolonged decline in fair value of investments below its cost. Where there is evidence of impairment, the cumulative loss, which is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized, is removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity investments are not reversed through profit or loss. Increases in fair value after impairment are recognized directly in other comprehensive income.

18 Offsetting of Financial Instruments. Financial assets and liabilities are offset and the net amount reported in the statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statements of financial position. Fair Value Measurement The Bank uses market observable data as far as possible when measuring the fair value of an asset or a liability. Fair values are categorized into different levels in a fair value hierarchy based on inputs used in the valuation techniques as follows: Level 1 - quoted (unadjusted) market prices in active market for identical assets or liabilities; Level 2 - valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; Level 3 - valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Bank recognizes transfers between levels of the fair value hierarchy at the end of the reporting year during which the change has occurred. Information about the assumptions made in measuring fair values is included in Note 7, Fair Value Measurement. Property and Equipment Land is stated at cost less any impairment in value. Depreciable property and equipment are stated at cost less accumulated depreciation, amortization and any impairment in value. The initial cost of property and equipment consists of its purchase price, including import duties, nonrefundable taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operations, such as repairs and maintenance, are normally charged to profit or loss in the year when the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

19 Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the property and equipment, based on the foregoing policies, are as follows: Asset Category Number of Years Building and condominium units 20 Furniture, fixtures and equipment 3 to 5 Leasehold rights and improvements 5 or the related lease term, whichever is shorter The estimated useful lives and depreciation and amortization method are reviewed periodically to ensure that the years and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognized. Fully depreciated items are retained as property and equipment until these are no longer being used in the operations. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation, amortization and any impairment loss are removed from the accounts, any resulting gain or loss is recognized in profit or loss. Assets Held for Sale Foreclosed assets are presented as assets held for sale in the statements of financial position and accounted for at the lower of cost and fair value less cost to sell. The cost of foreclosed assets includes the carrying amount of the related loan, less allowance for impairment losses, at the time of foreclosure. Impairment loss is recognized in profit or loss for any subsequent write-down of the asset to fair value less cost to sell. Branch Licenses Branch licenses are capitalized on the basis of the costs incurred to acquire and of bringing the asset to its use in the operations. Branch licenses are not amortized and deemed to have an indefinite useful life as there is no foreseeable limit to the period over which these are expected to generate net cash inflows for the Bank. Branch licenses are reviewed annually to determine whether events and circumstances continue to support an indefinite useful life assessment. The change in useful life assessment from indefinite to finite is accounted for prospectively. Other Assets Other assets include prepaid expenses, refundable deposits, documentary stamp taxes, other investments, deferred lease expenses, creditable withholding tax (CWT), RCOCI and other miscellaneous items. CWT. CWT represents the amount withheld by the Bank s customers in relation to its income. CWT are deducted against income tax payable provided that these are properly supported by certificates of creditable tax withheld at source subject to the rules on Philippine income taxation.

20 Prepayments. Prepayments are not yet incurred but paid in advance. Prepayments are apportioned over the period covered by the payment and charged to the appropriate account in profit or loss when incurred. Impairment of Nonfinancial Assets Property and Equipment. Property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Bank assesses at the end of the reporting year whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in profit or loss. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such reversal, the depreciation and amortization are adjusted in future years to allocate the asset s revised carrying amount on a systematic basis over its remaining useful life. Branch Licenses. Branch licenses are assessed for impairment annually either individually or at the cash generating unit (CGU) level, as appropriate. Equity Common Stock. Common stock is classified as equity and is measured at par value per share issued. Preferred Stock. Preferred stock is classified as equity if it is non-redeemable, or redeemable only at the Bank s option, and any dividends thereon are discretionary. Preferred stock is classified as a liability if this is redeemable on a specific date or at the option of the stockholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued. Retained Earnings. Retained earnings represent the cumulative balance of net income or loss, effects of the changes in accounting policy and other capital adjustments.

21 Other Comprehensive Income (Loss) Other comprehensive income (loss) comprises items of income and expenses (including items previously presented under equity) that are not recognized in profit or loss for the year in accordance with PFRS. Other comprehensive income (loss) of the Bank pertains to cumulative unrealized gains (losses) on AFS financial assets, cumulative translation adjustment and cumulative remeasurement gains (losses) on retirement liability. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts and rebates. The following specific recognition criteria must also be met before revenue is recognized: Interest Income. Interest income is recognized in profit or loss as the interest accrues, taking into account the effective yield of the asset. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective rate, transaction costs and all other premiums or discounts. Once a financial asset or group of similar financial assets has been written down as a result of an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. Trading and Securities Gains (Losses). Trading and securities gains or losses represent results arising from trading activities including gains and losses from changes in fair value of financial assets at FVPL, and disposals of financial assets at FVPL and AFS financial assets and gains and losses from derivatives transactions. Service Charges and Penalties. Service charges and penalties, which are presented under Service charges, fees and commissions in profit or loss, are recognized upon collection or being accrued when there is reasonable degree of certainty as to its collectability. Fees and Commissions. Fees and commissions arising from providing transaction services are recognized upon completion of the transaction. Fees or components of the fees that are linked to a certain performance of a service or a condition are recognized after performing the service or fulfilling the condition. Gain (Loss) from Assets Sold or Acquired. Income or loss from sale of properties acquired is recognized upon completion of the earning process and the collectibility of the sales price is reasonably assured. Gain or loss on foreclosure of properties is determined as the difference between the fair value upon foreclosure and the carrying amount of the loan. Gain or loss on foreclosure of properties is recognized when the risks and rewards of the property have been transferred to the Bank. Costs and Expense Recognition Costs and expenses are recognized in profit or loss when a decrease in future economic benefit related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Costs and expenses are recognized upon receipt of goods, utilization of services or when the costs and expenses are incurred. Interest Expense. Interest expense is recognized in profit or loss using the effective interest rate of the financial liabilities to which these relate.